Do social policies foster innovation? Evidence from India's CSR regulation

We examine the effect of social policies on corporate innovation using India's mandatory Corporate Social Re-sponsibility (CSR) regulation. This regulation mandates firms with pre-tax profits above a certain threshold to spend 2 % of the profits on CSR. We demonstrate a significant bunching of companies just below the profit threshold post-regulation compared to the pre-regulation period. Firms close to the profit threshold manipulate their earnings to avoid compliance by increasing their R&D expenses. We show that, on average, firms that increase R&D expenses to avoid the regulation apply for one more patent and announce two new products. The increase in R&D expenses and patenting is concentrated in firms with a prior history of innovation. Our results suggest that social policies can generate indirect incentives for innovation.